Crude profit taking & Browne’s Shale hypothesis

Concerns over a conflict in the Middle East involving Iran did ease off last week but apparently not far enough to prevent a further slide in the price of the crude stuff. A relative strengthening of the US dollar was also seen supporting prices to the upside despite Eurozone woes. So Brent resisted a slide below US$107 on Friday while the WTI resisted a slide below US$91 a barrel.

In fact, the WTI August contract reached a high of US$92.94 while Brent touched US$108.18 at one point; the highest for both benchmarks since May 22. This meant that the end of last week saw some good old fashioned profit taking with conditions being perfect for it.

However, on this crude Monday afternoon, we see both benchmarks dipping again. When the Oilholic last checked, Brent was resisting a slide below US$102 per barrel while the WTI was resisting a US$88 level. With the Middle East risk premium easing marginally, City traders have turned their attention to Spain.

Last week the country’s government predicted that the Spanish recession may well extend into next year. Additionally, the regional administration of Valencia asked for federal help from Madrid to balance its books. So what have we learnt over the last seven or eight trading sessions and what has changed? Well not much except that oil price forecasting often resembles an inexact task based on fickle market conjecture.

The bullish sentiments of last week were an aberration prompted by the perceived risk of a conflict in the Middle East which the Iranians would be incredibly barmy to trigger. Add the temporary lowering of oil production courtesy a Norwegian strike and you provide the legs to a perfect short term prancing bull!

Existing economic fundamentals and current supply demand scenarios did not merit last week’s pricing levels either side of the pond. The Oilholic agrees with the EIA’s opinion that the Brent price would indeed range between US$97.50 and US$99.50 a barrel up until the end of 2013. Analysts at investment banks and ratings agencies are also responding.

For instance, Société Générale has downgraded Brent price estimates by 10% over 2012-14, from US$117 a barrel to US$105. The French bank views oil market fundamentals as neutral for the rest of the year. Nonetheless, should the Brent price weaken below US$90, like others in the City, Société Générale says a Saudi response is to be expected.

For what it is worth, at least Brent’s premium to the WTI has been constantly taking a knock. By some traders' accounts, it is presently below US$15 a barrel for the September settlement contract having been at US$26.75 at one point over Q4 2011. As a direct consequence of the linkage between waterborne light sweet crudes, the Louisiana Light Sweet’s premium to the WTI is down as well to around US$16 a barrel according to Bloomberg.

Moving away from pricing, Lord Browne – the former boss of BP and a director of fracking firm Cuadrilla – believes shale prospection would rid the US of oil imports. Speaking in Oxford at the Resource 2012 forum on water, food and energy scarcity, Browne said the US will not need to import any crude within two decades.

He quipped that the amount of shale gas in the US was effectively “infinite". On a sombre note, Browne said, “Shale gas has a very bad reputation, as a result of the weak players cutting corners. Regulation tightening would be welcome."

His Lordship is known to be a member of the “All hail shale” brigade. Back in March he told The Independent newspaper that if fracking took off meaning fully in the UK, it could generate 50,000 British jobs. The country could very well need its own shale drive especially as a government watchdog recently warned of declining oil and gas revenues.

A consultation period is currently underway in London. All UK fracking activity ground to a halt last year, when a couple of minor quakes majorly spooked dwellers of Lancashire where Cuadrilla was test fracking. Given the incident and environmental constrictions, the Oilholic suspects that Lord Browne knows it is too early to get excited about shale from a British perspective. However, Americans see no cause for curbing their enthusiasm. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma 2012.

Spills, spin, morals & a trusty correspondent!

A corporate scandal, disaster or an implosion always creates an appetite for literature on the subject. Amid a cacophony of books – some hurried, some scrambled and some downright rubbish – you often have to wait for a book that is the real deal. The Oilholic is delighted to say that if BP, its culture, the mother of all oil spills and its underlying causes are of interest to you, then Reuters correspondent Tom Bergin’s book – Spills and Spin: The Inside Story of BP – is the real deal and was well worth the wait.

Perhaps for many potential readers of this book, the author - a former oil broker turned newswire correspondent - would be a familiar name; Bergin’s wire dispatches have been flickering on our Reuters monitors for some time. However, if you were a shade worried that so networked a man as the author would give some within BP an easy ride, then that worry gets smashed to pieces a few pages into the book.

The Oilholic can safely say that in the energy business there are no moral absolutes. On reading Bergin’s account, the “pre-spill” BP it seems lost sight of morals full-stop. In a book of just under 300 pages, split by ten chapters banking on his experience as an oil correspondent, the author notes that what transpired when Deepwater Horizon went up in flames was not some isolated incident. Via a fast paced and gripping narration, he provides an account as well as his conjecture about all things BP and where did it all start to go wrong.

In order to contextualise what led up to the Gulf of Mexico spill and its aftermath, Bergin first examines BP’s history and its trials in some detail, then the transformative impact – for better or for worse – of John Browne, his successor Tony Hayward and corporate decisions throughout their time which transformed a once troubled part player into a big league major.

For over a decade and more, accompanying this transformation was what the author describes as the most sophisticated PR machine of all times which failed miserably when the company faced its biggest modern day crisis thereby making the CEO at the time of the spill – Tony Hayward – the most hated or the most farcical man in America; some say both.

Browne’s ego, his protégés, advertising group WPP-devised “Beyond Petroleum” campaign, safety bungle after safety bungle from Texas to Alaska and boardroom politics are all there warts and all. It would be unfair to pick a component of the book and single it out as your favourite, for the whole book is. However, if one may take the liberty of doing so then Chapter 3 - "There's no such thing as Santa Claus" is the best passage of the book. Maybe the Oilholic is biased in favour of these few pages, for as a CNBC researcher working in the wee hours of the morning I had a firsthand feel of the "PR drive" Bergin refers to in that passage.

Lastly, if you thought a British, excuse me – an Irish writer (as he confesses to announcing himself when Stateside in the days of perceived anti-British sentiment) – may give former CEO Tony Hayward an easy ride then you are being unkind. In the spirit of journalistic integrity, Bergin gives Hayward – a man whom he often had unique access to – what we scribes describe as the “full treatment.”

When I met the author a few days prior to book’s release, he told me his work was not a damnation of a company based on a solitary incident, no matter how horrendous the Gulf spill was. Au contraire, Bergin notes the story of that spill itself did not begin on the night of April 20, 2010 but 20 years ago when a determined John Browne set out to create the largest corporation in the world followed by his successor Hayward’s own determination to succeed and then outdo his mentor.

Having read the book cover to cover and seen the author deliver on his promise, the Oilholic’s overriding thoughts are that Bergin’s Spills and Spin could in the fullness of time be as definitive a book on BP in wake of Macondo as Bethany McLean and Peter Elkind’s Smartest Guys in the Room was in wake of the Enron collapse.

This blogger is happy to recommend the book to fellow oilholics, students of the energy business, those interested in corporate history as well as the horrendous spill itself. Last but not the least, some from the PR industry might wish to read it as well; albeit as a lesson on what to omit from the PR playbook!

© Gaurav Sharma 2011. Photo: Front Cover – Spills and Spin © Random House Group